Why is the industry consolidating?
The bidding war over US Steel stems from the company's recent poor financial performance due to falling revenues while energy and raw material costs increased. As the chart below shows, US Steel’s financial performance (i.e., stock price) soared alongside HRC in 2020 and early 2021. However, US Steel's fortunes have turned as the HRC market has stalled and fallen since late 2021, while the company’s energy and raw material costs remained high. As US Steel's financial performance has stumbled in recent quarters, Cleveland Cliffs, ArcelorMittal, and Esmark have expressed interest in a potential buyout.
What could happen to HRC prices?
Industry consolidation could put greater pricing power in the hands of a smaller number of steelmakers. However, despite this pricing power, steelmakers are still subjected to market dynamics. The year 2023 alone has been a case study of how the steel industry has had to adjust prices based on changes in supply and demand. As illustrated in the chart below, CME HRC steel futures rallied in early 2023 when steelmakers raised physical prices and restricted supply amid increasing demand. When demand faltered in mid-2023, so did physical and financial market prices.
This price risk can be hedged!
Steel consumers can reduce or eliminate price risk by hedging at a predetermined price. In this case, they would buy CME HRC Steel swaps or options to protect against future physical purchases. These financial hedges are done through a counterparty (such as a bank or a broker) and are not meant to replace any purchases in the physical market but are a supplement to them. Hedging future purchases via CME HRC Steel swaps will make you less susceptible to the highly volatile spot market.
As we near the last quarter of 2023, some steel buyers might be calculating their potential end usage for 2024. The chart below demonstrates the current average price for 2024 CME HRC Steel futures and several ways a steel buyer can mitigate this price risk.
Futures forward curve nears spot prices...
Before we wrap up our analysis, we want to point out the futures forward curve. As the spot prices have fallen in recent months, the futures market for the latter half of 2023 and beyond has also fallen. However, as the chart below shows, most prices throughout 2024 currently hover near $800/T. Therefore, a steel buyer can still hedge future needs for 2024 at prices within $20/T (approximately) of spot market prices.
AEGIS can build your hedging program.
AEGIS can help steel buyers develop specific strategies that fit their operations. We are also happy to introduce new clients to more counterparties, therefore ensuring that you are receiving the best possible price. Please contact us for details.
Important Disclosure: Indicative prices are provided for information purposes only and do not represent a commitment from AEGIS Hedging Solutions LLC ("Aegis") to assist any client to transact at those prices, or at any price, in the future. Aegis makes no guarantee of the accuracy or completeness of such information. Aegis and/or its trading principals do not offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Certain information in this presentation may constitute forward-looking statements, which can be identified by the use of forward-looking terminology such as "edge," "advantage," "opportunity," "believe," or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.